Clearer picture of current financial crisis.

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We Might be in deep trouble with the real estate market. On second thought, YEH we are in deep trouble. 
Since I first wrote this article several months ago the situation has changed as has my knowledge level on the subject of mortgage backed securities. I wanted to update the article so it was more reflective of the current state of the housing market and the economy.

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I am not talking about a minor slow down or continued stagnation. We might be in for a continuation of the disaster that is occurring in certain cities around the country. Regardless of how the government and the National Association of realtors try to spin the current situation into something less that dreadful, there is no demand for real estate at the moment nor is demand likely to increase in the near future.
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I am having a hard time connecting the dots as to where the buyers, who will swoop in and buy all of this now affordable real estate, are hiding. The real estate market is not supported by first time home buyers. It never had been and never will be and the more the government tried to bring new home owners into the market to increase the historical average of home ownership, standards for qualification had to be relaxed. The balance of the market was lost when people were enticed to by homes without proper means or knowledge.

CURRENTLY I WOULD HAVE TO DISAGREE WITH WHAT I PREVIOUSL ASSUMMED.   SINCE THEN I HAVE RESEARCHED EXTENSIVELY ON THE REAL ESTATE CRISIS AND IT IS CLEAR TO ME THAT DEFAULTING SUB PRIME MORTGAGES WERE NOT THE CAUSE OF THE FINANCIAL MELT DOWN

However, this should not have been enough to completely wipe out the housing market and lead to a crash of up to 65% in many areas. How could a small number of foreclosures known as the “sub prime” problem derail the entire national housing market? It couldn’t and it never had in the past 70 years.  Those sub prime loans were refinanced or defaulted fairly soon after the recession started.

The sub prime excuse was just a way for the banks to deflect the spotlight from them so they could make a few more billion dollars, bilk the government for more bailout funds, and take giant bonuses. The housing market was heading into free fall and they (TBTFB) were well aware if the government wouldn’t step in and help them out, most of the major banks would have gone the way of Lehman Brothers. Yves smith summarized the issue very well October 31 2010 on her blog and in a New York Times op-ed story. Here is a quote from one of her responses to a comment submitted to her blog Naked Capitalism

Yves Smith says:


October 31, 2010 at 5:30 am


Jojo,


With all due respect, you are falling for the bank narrative on this one.


Yes, many subprime borrowers got in over their head. But the big resets on subprime were in 2007 and were pretty much over by late 2008. Most of those people have already been foreclosed upon, save where the banks have been dragging their feet.


Yves continues educating the commenter:


“You miss the fact that a lot of foreclosures in the past and now are due to servicer errors, plus normal credit losses, the biggie being job loss or hours reductions. This is not a simple “prudent v. imprudent” story.


When banks owned loans, they would ALWAYS restructure the loan of a viable borrower. Always. This is sound lender loss reduction behavior. Lew Ranieri, the father of mortgage backed securities, was clearly upset when he spoke at the Milken conference in 2008 about servicers using the MBS contracts as an excuse not to do mods. In his day, it was done as a matter of course because it reduced investor losses and hence was good business.’
End quote.

  I would also like to add that we don’t know people had gotten in over their heads. We have no record of how many people have avoided foreclosure or default over the past 40 years by selling their home. We can reasonably say that the CDS system substantially added to the housing decline. The effect of the prolonged and dramatic price decline took away the safety valve of selling a home to fend off foreclosure. Even if we had a reasonable real estate market with typically more stable appraisal values, thousands of people could have sold out with a minimal loss or breaking even. This would have accomplished 3 important things for the economy.

1. The banks would have cleared a potential toxic asset from the books.

2. It would have increased money supply by erasing a non- performing or poorly performing asset. Banks would have been in better financial positions with less risk of insolvency.

3. The homeowner would have been able to get out from under their debt if they had lost a job or had been transferred without having major credit score problems. They could have done their own reset until work picked up and they could then buy or rent.

The percentage of price decline has been severe enough to devastate the economy. The additional knockout punch has been the depth and length of this recession. We are now wiping people out completely as the banks bobbed and weaved their way out of the fight unscathed. Many very hard working Americans have faithfully taken their life savings to pay for their underwater mortgage for the past few years because they believed the government and the bankers, who were making claims it was just a sub prime issue housing prices would remain stable.. So now we are moving into year 3, year 4 and likely years 5 and 6 of this meltdown with millions of people still out work and now out of life savings, not because they were in over their head but because the banking system wiped out our economy.

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